ebay-business-model

How Does eBay Make Money? eBay Business Model In A Nutshell

eBay’s core business is a platform business model that makes money from transaction fees through its marketplaces. In short, eBay primarily makes money by charging fees on successfully closed transactions. For instance, in 2021, on an $87 billion worth of gross merchandise value sold on eBay, the company generated $9.77 billion in transaction revenues at an 11.19% take rate (fee).

Revenue Stream 2019 2020 2021
Transactions $6.58B $8.24B $9.77B
Mktg Services $0.85B $0.65B $0.65
Year Gross Merchandise Value
2019 $72.13B
2020 $87.6B
2021 $87.36B
Year Take Rate
2019 9.12%
2020 9.41%
2021 11.19%

eBay origin story

At the end of 2021, eBay had 147 million active buyers and 17 million sellers, which drove over $87 billion in Global Merchandise Volume (the volume of successful transactions that happened on the platform). 

eBay Inc. was formed as a sole proprietorship in September 1995 by Pierre Omidyar.

Before that, on Labor Day of 1995, eBay was called Electronic Bay, then Auction Web eBay, and it had no guarantees, no fees, or any mechanism to moderate disputes on the platform, nor payments platforms integrate (eBay would, later on, purchase PayPal, that would be then spun-off in 2015).

As the story goes, cheques would start to pile up so much on Pierre Omidyar’s desk that he had to move those to a business account finally and scale what would become one of the most valuable internet companies, which would IPO by September 1998 (about three years after its launch).

Back in 1998, that is how the company would get described in its financial prospectus:

eBay is the world’s largest and most popular person-to-person tradingcommunity on the Internet. eBay pioneered online person-to-person trading by developing a Web-based community in which buyers and sellers are brought together in an efficient and entertaining auction format to buy and sell personal items such as antiques, coins, collectibles, computers, memorabilia,stamps and toys.

ebay-revenues-1997-1998

eBay Financial Prospectus of 1998

By 1998 eBay was growing at a staggering rate. 

eBay business overview

eBay Inc. is a global marketplace platform, which today primarily consists of transaction revenues and marketing revenues: 

  • The core Marketplace platform includes the online marketplace, like ebay.com, and its mobile apps.
  • Other services offered on top of its platforms: those are services meant to support the activity of third-party sellers on the platform.

What’s eBay’s unique business advantage?

We are fiercely loyal in protecting eBay’s unique advantage as a true marketplace in service of small independent businesses, consumer sellers, and buyers, and working to dramatically simplify the buyer and seller experience.

As the 2018 Shareholders’ Letter mentioned, eBay highlights its crucial strength of empowering independent sellers and businesses.

That is a crucial point to emphasize, as it enables us also to understand why eBay is at its core platform business model, and how it is different from other companies like Amazon.

What are the core value propositions of eBay?

As a platform business model eBay has two core players:

  • Buyers
  • And sellers

They both enable the platform to be successful. Indeed, to offer great value to the buyer, the platform is centered on great variety.

And to be valuable to sellers, it has to attract a broad range of buyers willing to buy any object on the platform.

The company is focusing in the coming years toward:

  • Evolving to a managed marketplace.
  • Building a foundational product catalog.
  • Managing the end-to-end payment process.
  • Offering great selection and value.

Great selection and value are at the core of the eBay business model, which includes “new, everyday items as well as rare and unique goods.”

What value does the platform drive for each of its key players?

eBay value propositions for buyers

For buyers, eBay offers:

  • Expansive inventory at a usually good value.
  • Multiple delivery options.
  • eBay’s 110% Best Price Guarantee (in the US for certain categories of products).
  • Offerings below $10.
  • Money-Back Guarantee and eBay Authenticate (a mechanism checking the authenticity of certain categories of products).

eBay value propositions for sellers

For sellers, eBay offers:

  • The choice to list products and services through fixed-price listings or an auction-style format.
  • Ability to list items that are newly refurbished, used, and rare.
  • Promoted Listings.
  • eBay’s Top-Rated Seller program.
  • Insights on optimal listing and pricing through the Seller Hub portal.

How is the eBay business model different from Amazon? A platform business model at its core

Unlike other digital commerce businesses, we don’t compete with our sellers and we refuse to compromise the shopping experience to push “house brands” and irrelevant posts. Millions of small businesses and consumers sell only on eBay. I believe it’s because of our purpose and policies — this matters to customers. We fundamentally object to unnaturally bundling services to overcome barriers to competition. At eBay, we empower third party sellers to thrive, which actually serves consumers seeking value and selection. We are a benchmark on this. We always have been.

In its 2018 Shareholders’ Letter, eBay emphasizes the fact that the platform doesn’t compete against its third-party sellers, as it happens instead on a platform like Amazon, which, while enabling third-party sellers to host their products on top of Amazon e-commerce, it still also features its own branded products.

This is a key difference between eBay and Amazon.

In addition, where Amazon takes the money from transactions, then pays a fee to third-party sellers. eBay, instead, primarily takes a fee on a successful transaction.

In short, Amazon’s key strength is managing the cash generated through the platform.

EBay’s primary strength is its ability to connect buyers and sellers on various items not necessarily available elsewhere.

How does eBay make money?

eBay makes money in three ways:

  • Primarily through fees collected on successfully closed sales on eBay.
  • And other seller services are offered on top of its marketplaces.

eBay made over $9 billion in transaction revenues from marketplace fees in 2021. At the same time, it made around $650 million in marketing services in the same year. 

What are the key metrics to understand eBay’s business model?

Each company’s business model has its logic, and as such, it measures its success through a set of metrics.

For eBay, those are:

  • Gross merchandise volume.
  • And transaction take rate.

Gross merchandise volume

Gross Merchandise Volume (“GMV”) is defined as the volume of successfully closed transactions between users on eBay Marketplace and StubHub platforms.

This is a useful metric to understand the volume of transactions happening on the platform.

In 2021, the GMV was over $87 billion.

Transaction take rate

The transaction take rate is given by the Marketplace net transaction revenues divided by Marketplace GMV.

For instance, the transaction take rate in the eBay marketplace was around 11.9% in 2021.

The ability of the platform to increase its transaction rate over time while keeping its buyers and sellers community thriving is a signal of the platform’s strength.

It means the platform has become more valuable for both sides of the marketplace.

Thus, monitoring the increased take rate, over time, together with the growing community of buyers and sellers, is a crucial way to understand whether eBay’s marketplace becomes more or less valuable. 

How does eBay primarily spend money to make money?

To make money, companies must spend money.

Depending on the business model you might also be running, the essential expenses to make the bottom line work out might change.

In eBay, those key expenses can be summarized as customer support, site operations, and payment processing, which amounted to over $2.3 billion, or over 22% of its total revenues in 2018.

ebay-operating-expenses

eBay Annual Report 2019

Other key expenses are related to sales and marketing (32% of total revenues in 2018), primarily consisting of advertising and marketing program costs (both online and offline), employee compensation, user coupons and rewards, contractor costs, facilities costs, and depreciation on equipment.

Other key expenses related to product development and other general and administrative expenses.

eBay spin-off of PayPal

I covered in the PayPal business model how the company acquired at a certain point by eBay in 2002 for $1.5 billion.

At the time, PayPal needed a strong payment processing system within its core platform.

As the years went by, PayPal’s growth went far beyond eBay, which had worked as a primary growth driver for the company in the first years of operations. Until PayPal itself became more valuable than eBay.

paypal-revenues-2015-2018

Indeed, by 2018 PayPal made over $15 billion in revenues and over $2 billion in net income. In October 2018, PayPal’s market cap passed $120 billion, compared to eBay’s $32 billion.

Key takeaways from eBay’s business model

  • eBay, at its core, is a platform business model, or two-sided marketplace (with buyers and sellers as the two sides) measuring its growth based on the volume of successful transactions closed on its marketplaces.
  • It makes money primarily through transaction fees on its core platform.
  • Where business models like Amazon are still a hybrid between e-commerce and platform business, the company offers branded Amazon products, de facto, in some circumstances operating in conflict with third-party sellers.
  • eBay’s strength is that the company is aligned in doing its independent sellers’ businesses.
  • eBay bought PayPal for $1.5 billion back in 2002; then, it spun it off in 2015.
  • In the first years of operations, eBay was the primary platform driving the growth of PayPal.
  • As PayPal scaled, the company’s growth went far beyond eBay.
  • eBay remains a core e-commerce platform where the value of its operations is driven by its ability to empower third-party sellers by offering a wide variety of goods and merchandise.

Read next: PayPal Business Model

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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